With mortgage rates so low right now, does remortgaging for debt consolidation make sense?
It’s a question more of us are asking today. Over 6 million Britons don’t believe they will ever be debt free, according to new research. It found the average person in the UK owes £8,000. That’s on top of any mortgage debt.
A remortgage is when you swap your existing mortgage for a new one. This could be a case of changing products with your existing lender or switching to another mortgage lender.
There are two main ways that remortgaging can improve your situation when it comes to organising your debts:
- You can release the equity that’s in your property in a lump sum. Then use this to repay your other debts.
- You can reduce your monthly mortgage payment by moving to a better product. Then free up money to repay your other debts.
So should you remortgage for debt consolidation? Here are our five tips to help you decide if shifting your financial baggage to make life more manageable is right for you.
1) Get a Clear Picture of What You Owe
Loans, credit cards, mortgage payments and bills. We’ve all got them. So should you be worried about what you owe? The BBC has created an online Debt Test. Try it to help you to find out how likely you are to have problems with your borrowing over the next year or so. By completing it, you’ll have much better visibility of the shape of your finances.
2) Have a Look at Your other Debt Clearing Options
There may be other ways of paying down what you owe that are faster or cheaper. So it’s important to think these through first.
Options you could consider include balance transfer credit cards. These are good if you’ve already got some credit card debt but you’ve a decent credit history. Balance transfer deals mean you can shift debts to a new card at cheaper rates. To make this work, you need to be able to repay in a short time.
Another option is a personal loan. Again, you need to be in a position to pay this off fast. And of course, have a decent credit score to be eligible for one.
3) Decide if Your Big Goal is Really to Start Afresh
Are you looking to make a new start and manage your overall debts so that they are all in one place? Then remortgaging for debt consolidation can be a way to take control and get a psychological boost.
It’s important to remember with debts that it’s the interest overall cost – as opposed to the rate – that matters. The total cost of any debt depends on how long you have the loan going for.
Which of the following costs less? Borrowing £10,000 on a credit card with an APR of 18%, or on a 5% mortgage? Remember both are loans.
If you answered it depends, you’d be right. Borrow £10,000 over a 25-year period at 5%, you’ll pay £7,500 in interest. Borrow £10,000 at 18% over five years, you’ll pay £5,200 in interest. See the difference?
While mortgages will offer far lower interest rates than credit cards and personal loans, that doesn’t mean that remortgaging for debt consolidation will necessarily save you money.
You could be paying off your mortgage for a longer period than your other debts. Overall you could end up paying more as you’ll be stretching the debt out for longer.
So in some cases, a credit card will be better at handling your debt than a remortgage deal. Providing you can afford to pay it back.
If you can’t afford to pay back however, remortgaging can be a good solution. It can allow you to cut back your outgoings to a more manageable level on a month-to-month basis.
The impact of consolidating can make a turning point for people who have mounted up debts and are struggling to keep up.
4) Check if You have Enough Equity in Your Property
The best rates are available to those with the most equity in their homes.
You can only remortgage for debt consolidation if you actually have enough equity in your property. Currently the maximum loan to value (LTV) is 90%. That means if your property is worth £100,000, the total maximum borrowing you could request, including your existing mortgage, would be £90,000.
There are two ways to use your mortgage for debt consolidation. You could request a further advance from your existing lender. Your credit score will be important here.
Or you can apply to remortgage with a new lender. If you’re currently on a standard variable rate (SVR) and you’ve equity in your home, you’ve a good chance of having your application accepted for a cheaper deal.
But remember that there will likely be a set-up fee to pay. If you’re leaving your existing deal early, there could be an early repayment charge to factor in too.
5) Are You Shipshape enough to Qualify for a Debt Consolidation Remortgage?
Lenders are fussy now about whom they lend to. They will want to take a close look at your finances before they say yes.
New rules came into effect in 2014. They mean lenders are doing a lot more checks on borrowers’ income and outgoings. This is to be certain they can afford their mortgages now and in the future.
If your finances haven’t run smoothly since you last took out a mortgage, check your credit score. Each lender has its own criteria.
The lender’s aim is to ensure you’re a reliable customer who will make all repayments. It does this by credit-scoring you to predict your future behaviour based on your past and lower the risk of your defaulting.
If your credit score is not perfect, consider using a mortgage advisor. They have a good understanding as to which
lenders will allow what.
We’ve created a step-by-step guide to getting remortgage ready here so you can ensure you’ve got all your bases covered.
So is Remortgaging for Debt Consolidation Right for You?
The bottom line is that remortgaging to manage costly debt such as credit cards and personal loans is sensible as mortgage rates are lower than unsecured borrowing. But if you’re swapping short-term debt to long-term, you should be cautious.
For many people though, the gains of having debt in one manageable package make remortgaging a more hassle-free option. And the opportunity for a fresh start.
If you’d like advice on finding the most cost-effective product for remortgaging for debt consolidation for your circumstances, you can get in touch with us here.